Economic Highlight
New Delhi, 5 July
2021
FM’s
Stimulus
ABSTRACT,
PRICE CUTS VITAL
By
Shivaji Sarkar
A booster dose of about
Rs 6.28 lakh crore stimulus to push credit is supposedly an official phenomenon
to rev up the economy, but the market response looks muted.
The banks are
expected to lend about Rs 2.67 lakh crore to fund the Covid19-hit businesses. However,
the lending doesn’t help when the mood is down. The actual infusion is Rs 1.5
lakh crore. A key element of injecting cash in the system alright, but this too
remains elusive as it doesn’t help the poor. India must demolish the digital
Berlin wall, advised the International Monetary Fund (IMF) in 2019. And while eight
lakh Jandhan accounts were beneficiaries of PM Kisan funds of Rs 6000 each – Rs
480 crore, going digital is not the answer to stop fraud.
The share market
continued with a bear hug for four days before closing with a rise of 166
points on Friday, July 2, 2021 -- not a big deal but like most Fridays, it
breaks the monotony into a visible surge for record’s sake. The concern is that
institutional participation in the stock market has declined to a 15-year-low.
Finance Minister
Nirmala Sitharaman’s largesse is a difficult move by a government with a severe
financial crunch. This also is shadowed by a galloping inflation fueled mostly
by domestic factors though the global trends also are pushing it up. Sitharaman
should have looked around her table to rectify some of the anomaly. And she could
have easily done so at least for the fuel prices. Her advisors who suggested
that detrimental route are only good theoreticians. They are not aware that both
the Central and State governments are the biggest guzzlers of fuel and the
highest taxpayers to its own kitty. And it is mere window dressing for the
coffers. The outgoes in reality are much more.
Worse, it has hit all
industries, people and virtually bulldozed the poor. Another set of advisors go
on harping that road tolls, fees and user charges and high rail and transport
fares must hit the roof “to sprint to fast development” forgetting it is
eroding the very base of the economy – the purchasing power. Though the latest
CMIE report says, that eight lakh people have their jobs restored in June but
most of them on lower wages. The massive job losses are baffling everyone. The
income of 97 per cent households has declined since March 24, 2020 and it the government
free food doles that are sustaining the people.
The CPI index could
plummet many points if petrol and other fuel prices are cut by around Rs 40,
vehicles are not scrapped in the name of pseudo-pollution concerns,
transportation charges get reduced and high-handed police fines on people for
enforcing Covid-19 healthcare protocol are done away with. The police fines have
hurt the shops, vendors, many offices and individuals. They are definitely not
trained to behave but their rent-seeking is ruining the lowest level of
economic activities. A few studies have come out with miseries of many families,
some even committing suicide. While it may not be a welfare nation, at least it
could be humane. Uncertain official advices are bringing a bad name to the
political masters, who eventually may pay the final price of popularity.
The banks are also
shaking confidence of the people. Would more privatisation mean more outgo from
government and more miseries? No one is sure but banks themselves seem to be on
a shaky ground. Despite the government’s credit-driven stimulus to help tide
over the impact of Covid-19, bank credit growth hit a new low for the second
year in a row in FY21 at 5.56 per cent — the lowest in 59 years, according to
an analysis by the State Bank of India Research. It is lower than
financial year’ 20 when it grew by 6.14 per cent. In 1962, it clocked 5.32 per cent.
The Purchasing Managers’
Index (PMI) in June plummets to 48.1, lowest, below the critical threshold of
50, signifying contraction beyond the levels of April and May, when the
lockdown was severe. This suggests demand side problems, yet another testimony
that people are lacking in cash.
This has apparently
impacted investments, a determinant of future growth. The CMIE says
year-on-year growth numbers look impressive for the private sector on a low
base effect. The cost of continuing uncertainties are said to be heavy on
actual investment. New investment announcements continue to be at low levels.
The government itself is wary of investments because of strained finances. It
has led HSBC to moderate GDP growth to 8 per cent, lower than RBI estimates of
9.5 per cent.
The industry fears
that as the government largesse would depend on higher credit from the market,
lending for them would be costlier. The Reserve Bank of India itself has
indicated a rate rise by the next quarter or so and is pessimistic of growth.
The silver lining is that Nomura India Business resumption index hints at
recovery from a sharp collapse on May 23 at 60.3.
The market concern is
reflected over the drop in flows from foreign and portfolio investors to the
stock market due to elevated share valuations. In other words, there are
apprehensions about actual equity prices. In June, their market share dropped
to 30 per cent against retail investors of 70 per cent. The average of
portfolio investment was around Rs 25,200 core a day at NSE and BSE, an extreme
low. The FPIs sold stocks worth Rs 8,500 crore between April and June after
buying Rs 44,500 crore stocks during January-March. The interesting aspect is
that stock market is not indicator of the buoyancy but hints at conducive atmosphere.
Meanwhile, the ‘bad
bank’ that is to come up has a pile of Rs 2 lakh crore debt, about a quarter of
the country’s non-performing assets (NPAs) may not resuscitate the economy nor
the privatisation causing more outflow of public funds.
So the stimulus
pushes theoretical expenditure to about Rs 36.6 lakh crore. It may not exactly materialise.
The net push may be far less and may result in lesser flows to the purchasers
though it might push official deficit to 7.5 per cent, in actuality it may be a
few notch more. Many companies and units are closing down. Even the government
is downsizing as costs go up with inflation.
Mere stimulus would
not work. Digital pushes have blunted cash flow and increased operational
costs. The country has to bring down administered prices, enhanced taxes,
transportation costs to make the people and businesses comfortable. The
solutions are there alright, but one has to trudge the right road. ---INFA
(Copyright, India News & Feature
Alliance)
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